I'm an extreme outlier. Not just because I only own one pair of trousers (ask me about that some time), but when it comes to property I'm unusual in that I'll buy anything…anywhere.
Most investors focus on one particular locality – and most have a preference for either houses or flats, for example. In fact, the most successful investors I know buy the exact same type of property over and over again – because that way it's easiest to get the numbers right and be sure about the demand.
But I'm just too flighty for that. Instead, I'll buy (pretty much) anything (pretty much) anywhere – and I've developed a pretty comprehensive research process to compensate for my lack of specialist knowledge.
In fact, I'm not really looking for properties at all: I'm looking for deals.
In order for me to be interested, the deal needs to fit into one of four “buckets”. No opportunity is ever perfect in every way, so instead I look for a particular set of criteria that's sufficient to get me interested.
Here are the four types of property deal I look for…
This is the lazy option: a property that's already in good condition, tenanted, and generating income from day one. Sign a few bits of paper (and probably argue with a few solicitors and estate agents), and it's mine.
A lot of people don't like buying tenanted property, but I really do – for two reasons:
- It eliminates any void period at the start, and saves the inevitable hassle and maintenance that's always reported when tenants first move in.
- It removes any risk of being wrong about the level of rent the property could achieve. It's possible that it could achieve more, but in my experience it's rare (although not impossible) for tenants to be in occupation paying an above-market rent.
(When you're inheriting tenants, there are extra things you'll need your solicitor to take care of – and because many solicitors aren't used to this type of transaction, the onus is on you to make sure that happens. I cover this in my book and will write a post about it soon because I see this go wrong all the time.)
There's nothing wrong with being lazy for laziness' sake: time is a finite resource, and there are plenty of things I'd rather be doing than overseeing refurbs or finding tenants. But on top of mere convenience, I'll always be looking for one of two reasons other than just laziness to buy a turnkey property:
- Capital growth potential: the price isn't “below market value”, but there's potential for the value to increase over and above what the overall market is expected to do.
- High yield. No work to do, and sit back to collect 8%+ gross yields forever? Don't mind if I do.
2. “Solid performer”
If a property isn't completely up and running, I'll want some kind of reward for going to the effort of doing a light refurbishment, getting tenants in, and so on.
But that reward doesn't have to be huge: sometimes, “good enough” is good enough. My criteria for a “solid” investment are:
- Around 10% below market value (BMV).
- A good yield.
(We could argue all day about whether “BMV” makes logical sense given that the transaction by definition sets the market value, but there's no doubt that circumstances sometimes allow you to buy a property for less than you'd normally expect it to be worth.)
There's not enough discount or margin to do anything fancy (that's coming up in a minute) and it's not going to change anyone's life, but sometimes there's nothing wrong with building in a little extra equity at the start then sitting back and collecting a good income every month.
3. “Flippable” or “Recycleable”
These beasts are out there lurking in auction catalogues and agents' windows, but it's like a giant game of “Where's Wally” trying to pick them out from the hundreds of more average opportunities that are crowding them out.
The game here is to combine a discounted purchase and the potential to add value, allowing you to:
- Re-sell the property quickly (“flip”) at a good profit.
- Refinancing to pull out (“recycle”) as much of your cash as possible. (I write about this concept in a lot more detail here.
The criteria are similar: ideally, I'm looking for purchase price + costs to be less than 80% of the end (refurbished) value. This would allow for most of the cash to be released on refinancing, or for the property to be sold at a good profit.
(Having similar criteria for both options is useful, because it gives a built-in Plan B: you might buy with the intention of selling the property (so be targeting an area with a strong re-sale market), but also check that you'll be able to rent it out if you can't find a buyer.)
As the aim here is to bank the gain in the short-term, buying with a mortgage won't do the trick. In the absence of sufficient money in the bank, the only options are bridging finance or using a JV partner's cash – both of which involve high costs relative to a mortgage, and need to be factored into the “costs” part of the equation.
4. “Something special”
These are the opportunities with the potential for big profits – like getting planning permission to build a new house in the garden, turning a pub into a block of flats, or anything more than your standard “buy it, tart it up a bit, let it out” kind of deal.
Because these are the most profitable opportunities, they're the ones that everyone is looking for – and also the ones that tend not to make it as far as estate agents or auction houses, unless the owner doesn't realise quite what they've got. They're also the deals with the most risk: building costs spiralling out of control, planning being knocked back, and so on.
And that's why they're so profitable: they're hard to find, they're more work to execute, and they're more risky.
Because of my well-documented laziness, I don't tend to go looking for these – but occasionally stumble across them while looking for something else. The other day, for example, I was looking at an immaculate tenanted flat – when the vendor mentioned that they'd previously had permission to build a house in the garden, but hadn't had the funds to complete it.